Motilal Oswal Research has reaffirmed its BUY recommendation on Kaynes Technology, setting a target price (TP) of Rs 6,400, indicating a 27% upside potential from the current market price of Rs 5,049. The research highlights the company’s strong growth trajectory, especially within the smart meter business, supported by substantial demand from the Indian government’s initiatives. The report anticipates robust earnings growth, improved margins, and expanding market opportunities, positioning Kaynes Technology as a key player in the electronics manufacturing and smart meter sectors.

Expanding in the Smart Meter Segment

Scaling operations amid growing demand
Kaynes Technology is capitalizing on the growing smart meter market, driven by the Government of India’s Revamped Distribution Sector Scheme (RDSS). The RDSS scheme aims to replace 250 million conventional meters with smart meters by 2025, offering significant opportunities for manufacturers like Kaynes. To meet this demand, the company has opened a new electronics manufacturing facility in Hyderabad with the capacity to produce 4 million smart meters annually.

Strategic acquisition to enhance capabilities
In a strategic move to further strengthen its position in the smart meter segment, Kaynes recently acquired Iskraemeco India, a major player in smart meter installation and maintenance. This acquisition enhances Kaynes' service offerings, allowing it to not only manufacture smart meters but also provide after-sales and installation services. The acquisition is expected to bring additional revenue streams through maintenance charges, providing recurring income for up to 10 years post-installation.

Opportunities in the Smart Meter Market

High potential from pending installations
While the government has sanctioned the replacement of 222.5 million meters, only 14.5 million smart meters have been installed as of September 2024. This leaves a substantial opportunity for companies in the Advanced Metering Infrastructure Service Providers (AMISPs) and System Integrators (SIs) space, including Kaynes. The total opportunity translates to approximately Rs 632.8 billion, with the company expecting to capture a significant market share over the next few years.

Projected revenues from smart meters
Kaynes expects to generate annual revenue of Rs 8 billion to Rs 10 billion from the smart meter business starting FY26, with Rs 4 billion to Rs 5 billion anticipated in FY25. These revenues will be driven by orders from key clients, such as Power Grid Corporation of India Ltd (PGCIL), and the company's recent acquisition of Iskraemeco India, which brings in additional orders from the Gujarat and West Bengal governments.

Strengthening Manufacturing Capabilities

New Hyderabad facility with expansion plans
Kaynes Technology's new manufacturing facility in Hyderabad is a significant milestone in the company’s growth. With an initial capacity of producing 3,000 smart meters daily, the facility is fully automated, using advanced robotics and minimal human intervention. The company plans to further expand this facility, increasing production capacity to 10 million meters annually by next year. This expansion aligns with the company’s strategy to meet growing demand and establish itself as a leading player in the smart meter market.

Robust Financial Growth Trajectory

Revenue and profit growth forecasts
Kaynes Technology is on track to achieve a revenue CAGR of 57% over FY24-FY27, driven by its expanding order book and higher-margin business segments. The company’s EBITDA is expected to grow at a 64% CAGR, while adjusted PAT is projected to rise at a 71% CAGR during the same period. This growth will be supported by a strong pipeline of orders, particularly from the smart meter and electronics manufacturing services (EMS) segments.

Improving margin profile
The company's EBITDA margin is set to improve from 14.1% in FY24 to 16.1% in FY27. This increase will be driven by the growing share of higher-margin products, including smart meters, as well as the company's focus on operational efficiency and automation in its manufacturing processes.

Valuation and Target Price

Valuation based on future earnings
Motilal Oswal has valued Kaynes Technology at 60x its projected earnings per share (EPS) for June 2026, arriving at a target price of Rs 6,400. The stock currently trades at a P/E multiple of 94.5x for FY25 and 53.6x for FY26. Despite these high valuation multiples, the company’s strong growth outlook, expanding market opportunities, and improving margin profile make it an attractive investment for long-term investors.

Strong order book supports growth
The company’s order book has grown at a 85% CAGR over FY20-FY24, and this trend is expected to continue as Kaynes secures more contracts in the smart meter and EMS sectors. The robust order pipeline, coupled with ongoing government initiatives, positions the company for sustained growth over the next few years.

Key Risks and Challenges

Slower-than-expected smart meter adoption
One of the primary risks facing Kaynes Technology is the slower-than-expected adoption of smart meters. Although the government has ambitious targets for replacing conventional meters, the pace of installations has been slower than anticipated. Any further delays could impact the company’s growth projections in this segment.

Economic slowdown or policy changes
An economic slowdown or adverse changes in government policies related to smart meter installations could pose challenges to the company’s growth. Additionally, any disruptions in the supply chain or increased competition from other manufacturers could affect the company’s margins and profitability.

Conclusion: A Strong Investment for Long-Term Growth

Motilal Oswal's BUY recommendation for Kaynes Technologies is based on the company’s strong growth potential in the smart meter market, its expanding manufacturing capabilities, and its improving financial metrics. With a target price of Rs 6,400, representing a 27% upside from current levels, Kaynes offers a compelling investment opportunity for long-term investors looking to capitalize on the growth of India’s electronics manufacturing and smart meter sectors. Key factors to watch include the pace of smart meter installations and the company’s ability to continue securing high-margin contracts.